FCA’s pricing review – will it ‘level the playing field’ for insurance sector?

Insurance2025: The insurance industry is going to have to ”trust each other as participants” if the FCA’s general insurance pricing reform for the home and motor insurance markets is going to succeed at creating a ”level playing field” for new and existing customers, said Michael Lawrence, distribution and underwriting director at insurer LV=. 

Lawrence, who was speaking as part of a panel discussion on the first day of Insurance Times’s virtual Insurance2025 conference, was referring to the regulator’s General insurance pricing practices market study report, which was published last September.

This proposed a range of remedies designed to tackle price walking, including that renewal prices equal new business prices for home and motor insurance, products must offer fair value, that firms report certain data sets to the FCA and auto-renewals are made easier to stop.

Insurance firms have until the end of the year to fully implement the FCA’s measures, after the industry argued that the regulator’s previously announced four-month implementation window was simply not enough time to get the job done.

Lawrence told online delegates: “At first sight, the remedy itself might be trying to achieve this level playing field, but in reality, we have got thousands of market participants doing different things at different times.

“We need to trust the regulator that it will be a level playing field in terms of everybody will need to be fully compliant by a certain time.

”We have to trust each other as participants that we are all going to follow the principles.”

Speaking about the impact of these changes on brokers, Be Wiser’s chief risk and compliance officer David Russell said: “There is a lot of benefits with this regulation, giving stability in the way that we deal with prices and trying to tackle the issues that discounting is causing us.”

Continuing the insurer perspective, however, Lawrence added: “On the one hand, motor brokers don’t operate on a lifetime value model - as they are not our customers, we cannot control whether they are going to stay with us.

”But, we do have multiple broker panels and multiple products across multiple software houses and that’s part of the challenge for us, making sure that every single step of the way that we are complying.”

Slightly harder for intermediaries

Price comparison websites (PCWs) could also take a hit under the new rules.

However, Graham Wright, UK lead of P&C personal lines pricing at Willis Towers Watson, said there are differing arguments as to the resulting impact on these businesses.

He explained: “Any impact on them is going to influence how customers respond to this. You have to keep in mind that customers are not really interested in insurance. So, until they change their shopping habits and decide that PCWs have nothing to offer, there will probably still be a decent amount of footfall.”

Wright gave the example of the FCA’s action around clearer auto-renewal exits, which could mean that customers who previously auto-renewed their policy every year might be shopping around more in the future.

“I am sure that PCWs will be very creative in the way they come up with different ways of displaying value. I suspect they will try and provide ways in which consumers can compare on things beyond price,” he said.

In the short-term, Wright believes “there will be very little different”, but “in the medium to long-term, as with the insurers and intermediaries, it will be a question of who adapts to the new world most effectively”. 

He noted a school of thought among intermediaries and personal lines insurers affected by this, in that the rules make it “slightly harder for the intermediaries” as there is a requirement at the pricing level for compliance to occur at each stage of the distribution chain.

This means intermediaries need to show compliance around the net rate and final customer price, while in the direct arena, compliance is only at the final customer price.

Wright said: “It is incumbent on both players in the chain to demonstrate that is true for their portion of the price setting journey, which is why it makes [it] arguably harder as there is often an arm’s length relationship in some respects and a fledged working relationship in others.”

Preparedness

In terms of “preparedness” ahead of the FCA’s deadlines, Wright warned that if firms were only halfway into their implementation journey, then firms are not quite on track.

In terms of complying with the rules, once effective, Wright argued that different firms will have different interpretations of what actioning the rules mean - plus, there will be further intricacies too, such as the pricing margin.

Russell added: “Some of those details will potentially become a red herring.”

Sicsic Advisory’s managing director Michael Sicsic said: “People have underestimated the work involved in fair value.”

Sicsic defined “fair value” as the relationship between the quality of the product and the overall price. He believes this concept will raise quite a few questions.

Fair value will apply to all products, the only exceptions being reinsurance and large risks.

Sicsic pointed out that SMEs could be more affected here as they have a longer value chain, which means that each actor in the chain needs to comply with the incoming rules.